Fundraising

The following is a list of the post titles by author under this topic. Scroll further down this page to find the actual blog post by your selected author. Author’s posts appear in reverse alphabetical order. For example, following this list, Fred Wilson’s posts appear towards the beginning of the blog page, and Marc Andreessen’s post appears towards the end of the blog page.

MARC ANDREESSEN (1 post)

Marc Andreessen: Do Whatever is Required to get to Product/Market Fit

BOSTON MILLENNIA PARTNERS (1 post)

Boston Millennia Partners: Early Stage Investing is Far from an Exact Science

JEFFREY BUSSGANG (3 posts)

Jeffrey Bussgang: How to Select a Venture Capitalist

Jeffrey Bussgang: Be Wary of Term Sheet Tactics

Jeffrey Bussgang: Relationship between Option Pool Size & Price

RON CONWAY (1 post)

Ron Conway: What Ron Conway Looks For in a Deal

CHRIS DIXON (9 posts)

Chris Dixon: How Much Seed Money to Raise

Chris Dixon: Think of Dilution over the Company’s Life & How Much to Raise

Chris Dixon: Best Thing when Considering Raising Money

Chris Dixon: Problems Taking Seed Money from Big VCs

Chris Dixon: Nothing More Dilutive & Morale-Crushing than a Down Round

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

When entrepreneurs go to market for subsequent investment rounds, Wilson says that “as part of the transaction the [option] pool will get increased again. [Wilson likes] to do these refreshes as part of the financing negotiation since it is all about price.” Fred Wilson, Valuation and Option Pool, Nov. 6, 2009 comments section http://www.avc.com/a_vc/2009/11/valuation-and-option-pool.html#comment-22043449

“[] If you [] sold [your company] for $100 million and you and your co-founders are gonna make a bunch of money [] you really ought to make sure that every single person who was involved in making that success happen makes a bunch of money too.”

“[] nobody will get more diluted than [the co-founders] because [the co-founders] are there at the very beginning and the dilution will happen over time. And the person or the investor who shows up at the very end of the process might never get diluted. The person who was there at the very beginning gets diluted the most.”

“[] The sooner you can stop talking about equity in percentages and start talking about it in dollars is the sooner that you are going to own more of your company than you would otherwise.” Fred Wilson April 19, 2012 MBA Mondays Live: Employee Equity - Archive and Feedback- video;

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“One [] contentious [] negotiation [point] between an entrepreneur and a VC [], particularly [in] an early stage financing, is the inclusion of an option pool in the pre-money valuation. [] [The] fact [is an option pool] is simply about price. [Example]: [] $3.25mm pre-money with no option pool [can be equivalent to] $4mm pre-money with one. [] What an entrepreneur needs to do is find out what the market price for [his] company is with and without an option pool in the number. [Then], the negotiation over this point is [] less contentious.”

“[] [Wilson acknowledges that if] options are counted in the pre-money, entrepreneurs will want commensurately higher valuations to compensate for the additional dilution.”

“[][The] option pool request needs to be reasonable and based on [a] budget. [Wilson looks for] enough options [in] the "pre-money pool" to fund the hiring and retention needs [] until the next financing.” Wilson wants an option pool in the pre-money when he invests. Fred Wilson, Valuation and Option Pool and comments, Nov. 6, 2009; http://www.avc.com/a_vc/2009/11/valuation-and-option-pool.html#comment-22043449

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“[Some] founders [] suggest building the business first (even if it takes longer) and then seeking investment later after it's proven successful and has a strong growth trajectory. [] Examples [][are] StackExchange and DuckDuckGo.” Wilson responds that “[] that's a great model if you can do it.” Fred Wilson Burn Rates: How Much? Comments section, Dec 12, 2011 ; http://www.avc.com/a_vc/2011/12/burn-rates-how-much.html

[Wilson has] two basic rules of thumb [for the amount to raise in early stages, i.e., seed, Series A and B rounds]. First try to dilute in the 10-20% band whenever you raise money.” 10% is preferable. More may be necessary, “[] but try [] to keep [] dilution below 20% each round. If you do two or three rounds [exceeding] 20% each round, you’ll end up with too little [equity].

Second, raise 12-18 months of cash each time you raise money. Less than a year is too little. [] Longer than 18 months means you may [have cash when the company had at a lower valuation].

[] When [a] company gets above 100 employees and valued at north of $50mm, things change. You may need [] more cash [] for working capital [] and [the company] may not be increasing value [as rapidly as] when [it was] smaller.” A raise of 24+ months cash may then be appropriate. Fred Wilson, How Much Money To Raise, Jul 3 2011; http://www.avc.com/a_vc/2011/07/how-much-money-to-raise.html

Mark Suster Partner Upfront Ventures and former entrepreneur

“Valuation = whatever an investor is willing to pay. Investors want to own 25-33% so it can be determined by how much you raise. [] early investors know how much they want to invest and what the norms are by stages. There are huge variances (and prices go up and down dependent on market conditions), but general guidelines on valuation:

Mark Suster Partner Upfront Ventures and former entrepreneur

“The VC assumes [there will be] an option pool [] to hire and retain talent to grow [the] company. [] The more senior members [the company has], then the [fewer] options [needed] and vice versa. Industry standard post [the] first round of funding will be 15-20% [for the option pool]. [Suster] say[s] “post” funding because [one will] need more than this amount pre-funding to get to this number after funding. []

[It’s standard] that the VC wants the options includ[ed] before [he] funds [].” The option pool dilutes the founder’s percent ownership, not the investor’s. The option pool suffers the same percent dilution the founder suffers when a VC invests his money.

“Note that the term sheet [says “Pre-Money” valuation and nowhere does] the term sheet [say] “true Pre-Money” or “effective Pre-Money”– that’s for [the founder] to calculate.” True or effective pre-money is based on a lower price/share due to options increasing the number of shares incorporated in the calculation. The result is a lower true pre-money than pre-money, the latter which is also called “nominal” pre-money valuation. Mark Suster Want to Know How VC’s Calculate Valuation Differently from Founders, July 22, 2010; http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] Angel investors [] [invest] at the highest risk because much less is proven in the business. They expect and need to earn a much higher return for the risk they’re taking.

[] When a [Series] A investor gets involved, usually product has shipped, usually [there are] the first clients and some proof points, management team is better and solutions are more thought-out.

[] [In] Series B [investors] are looking at metrics [] like how many clients have [been] signed up, [] costs of acquisition, [] conversion rates, [] LTV (lifetime value of customer), [] churn, and they want to see data, facts and figures.

[] [Almost] all VCs care about investing in big markets with ambitious teams.

[] Most VCs want to own between 20-25% minimum of [a] company. [] [Investors need to] own enough [equity] to make it worth their time – thus “money”. And all of this is wrapped up in forward progress that [entrepreneurs] demonstrate over time.” Mark Suster, The Four Main Things that Investors Look for in a Startup, October 6, 2010

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] most VCs have a 20% minimum [equity threshold] so bringing in multiple VCs can be very expensive in terms of dilution. [] The biggest problem [with 2 VC’s in a deal] is the “squeeze.” All VCs want to own between 25-33% [equity]”, above their internal 20% minimum. A founder with co-founders can quickly get very diluted once an option pool is included. “[]There are [] VCs [] who don’t cling to the old “20% or the highway” mentality [] and [Suster] suggest[s] [founders] seek them out.” Mark Suster, How Many Investors are Too Many? February 22, 2011; http://www.bothsidesofthetable.com/2011/02/22/how-many-investors-are-too-many/

Mark Suster Partner Upfront Ventures and former entrepreneur

“VCs want big outcomes. [VCs] will demand a veto right over [a company sale]. [A founder] might be very happy selling [his] business for $9 million and owning 50% of the company. [A] VC is not necessarily going to be happy getting $3 million for his 33% stake for which he invested $1 million.

[While that’s] a 3x return [] it’s still just $3 million and if the VC has a $300 million [fund] it is just 1% of the money [needed] to reach his “hurdle rate” of when he’s entitled to earn carry (e.g. big bucks). It’s just too much time to spend [] for such a small total return. Many VC’s would still let [a founder] sell []” but some would block the sale. Mark Suster Do You Really Even Need VC? July 22, 2009; http://www.bothsidesofthetable.com/2009/07/22/do-you-really-even-need-vc/

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] any [early stage terms] will certainly be asked for by future investors in [] later funding rounds so all of these terms pile up [after] 3-4 rounds of funding over a 5 year time frame. And by the time most companies get to an exit [which realistically is still 8-10 years,] often the founders own very little of the economic upside." Mark Suster, Want to Know How VC’s Calculate Valuation Differently from Founders? July 22, 2010

Mark Suster Partner Upfront Ventures and former entrepreneur

Negotiations between entrepreneurs and investors include dilution and other fundraising terms. “[] the “fairway” of [investor’s equity] is 25-33% per round [i.e., entrepreneurs’ dilution]. [] If [the entrepreneur is] “super hot” or “super experienced”, [he] can end up with much less dilution –in some cases 12-15%. But this is the exception, not the rule.”

Mark Suster Partner Upfront Ventures and former entrepreneur

“[]Domain knowledge [] [is] [well-honed industry knowledge].” “[] It requires domain knowledge to know what you’re talking about and success long term as an angel. [] One of the biggest problems is when “you don’t know what you don’t know.””

A company is either acquired or has an IPO in an average 7-10 years. Suster says that angels’ deep pockets providing follow-on investments minimize these risks: dilution, inability to protect good investments and a lack of deal diversity. “[] [Angels] need to be able to do a large enough number of investments to create enough deal diversity.” The greater the deal diversity, the lower the risk.

“[] the best investors influence their end-games through well-cultivated relationships with eventual buyers of their portfolio companies.” [] [Helping] companies exit to the right buyer and importantly at the right time” can be crucial. Mark Suster, Angel Topics Sept. 14, 2010 http://www.bothsidesofthetable.com/angel-topics/

Mark Suster Partner Upfront Ventures and former entrepreneur

Suster advises entrepreneurs to select the highest quality and most experienced investors available. It’s generally better for the company long term to have the right investors vs. optimizing every last piece of equity up front. “Worrying about giving up an extra 10% [equity] at [an early] stage can be meaningless if the ultimate outcome is either success or failure.” Mark Suster, Raising Angel Money, July 19, 2009; http://www.bothsidesofthetable.com/2009/07/19/raising-angel-money/

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] [Suster has] seen a destructive cycle where otherwise interesting companies have been screwed by raising too much money at too high of prices and gotten [] [trapped] when [] markets correct and they got ahead of themselves [on inherent market valuation]. []

[It’s] OK to [] shoot for the “top end of normal” for the market conditions. [] [He] caution[s] entrepreneurs from [] raising money at significantly ABOVE market valuations. []

If [entrepreneurs] haven’t figured out product / market fit and therefore still have a highly risky business [they] run great risks for getting too far ahead [] on valuation. [] [Most] investors won’t want to [][do] a “down round,” which creates tension between them and early investors.

[] [Sophisticated] investors know [a major down round] is fool’s gold. They get a cheaper price, [] wipe out much founder stock value and [] reissue [founders] new options. [Founders] take the money []” except their incentives get eliminated.